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Monday, August 27, 2007

No Rate Cut In September

I believe that this week traders will realize that Bernanke will not cut in September and start pricing accordingly. It is going to take traders a while to realize that Bernanke is NOT Greenspan.

As Bernanke Retreats to Wyoming, Critics Ask Is He Prime Time: “Ben S. Bernanke's critics from Washington to Wall Street are starting to ask whether the Federal Reserve chairman is ready for a prime-time crisis.”

Traders really do not understand Bernanke and know it. This makes them a very nervous bunch.

Home Depot Cuts Supply Unit Price to $8.5 Billion (Update1): “Home Depot Inc., the world's biggest home-improvement retailer, agreed to sell its construction- supply unit for $8.5 billion, cutting the price by 18 percent as the U.S. credit squeeze curbed demand for leveraged-buyout debt, three people familiar with the agreement said.”

While this deal did go through, an 18 percent price cut is a wake up call. It is only a matter of time before traders and bankers start to questions the valuations of some of the massive still pending LBOs.

LBBW to Buy SachsenLB to Help Rescue State-Owned Bank (Update2): “Landesbank Baden-Wuerttemberg, the largest German state-owned bank, agreed to buy Landesbank Sachsen Girozentrale following a 17.3 billion-euro ($23.7 billion) credit bailout because of investments in U.S. subprime debt.

LBBW will pay at least 300 million euros for the bank and immediately provide 250 million euros in cash for SachsenLB, whose finance affiliates have struggled to sell commercial paper amid a global credit crunch. A final purchase price will be set by the end of the year, LBBW said yesterday in Stuttgart.”

A $23.7 billion bailout is not insignificant. The new combined bank will be busy, maybe for years, fixing this mess. As financial institutions around the globe tighten up and look inwards there will be very real consequences to the global economy.

The McClellan Oscillator (Ratio/Adjusted) for both the NYSE and NASDAQ has shot from deeply depressed oversold levels straight to overbought. This is yet another argument for a short term top in the very near future. Existing home sales today might be the catalyst to turn the market down.

I use a 50 and 200 day EMA of the McClellan Oscillator to 'smooth' the data. Both averages fell below the zero line in mid May signalling the deterioration of market internals even as prices continued to march higher.